Reverse-Flipping: Why Indian Startups Are Coming Back ‘Home’

The Indian startup ecosystem, once marked by a trend of flipping operations overseas, is now witnessing a significant reversal as startups return to India. This phenomenon, termed reverse-flipping, reflects India’s growing appeal as a global business hub and the effectiveness of recent regulatory reforms. From cutting bureaucracy to providing competitive valuations, this shift is reshaping India’s entrepreneurial landscape.

Today, TICE explores the growing trend of reverse-flipping, delving into the nuances of this concept and uncovering the key factors driving more companies to return to India.

What is Flipping?

The term flipping emerged in the early 2000s, describing the practice where Indian startups shifted their parent companies to foreign jurisdictions like Singapore or the US. This was driven by several advantages:

• Access to Capital: Deeper financial markets abroad.
• Favorable Regulations: Streamlined tax frameworks and fewer compliance hurdles.
• Higher Valuations: International investors often valued Indian companies higher.
• Branding and Reach: Being seen as a global entity helped attract global talent and customers.

For instance, leading companies like Flipkart and Freshworks followed this route in their early stages, using foreign bases to access better funding and operational benefits. However, this trend is changing dramatically.

Reverse-Flipping: The New Reality

The tide is turning, with Indian startups like PhonePe, Groww, and Pepperfry relocating their headquarters back to India. Others, including Razorpay, Pine Labs, and Meesho, are in various stages of this transition.

Key Drivers of Reverse-Flipping

1. Regulatory Reforms In September 2024, a landmark amendment to the Companies (Compromises, Arrangements, and Amalgamations) Rules 2016 removed the need for National Company Law Tribunal (NCLT) approvals for cross-border mergers. This streamlined the process, cutting timelines from up to 18 months to just a few weeks.

   The Foreign Exchange Management (Cross Border Regulations) 2018 further eased these mergers, simplifying compliance for startups relocating operations back to India.

2. Investor Sentiment Global investors now view India’s stock markets and IPO ecosystem as competitive. Indian markets have shown resilience and growth, with over 10 crore unique investors in 2024, compared to just 3 crore in 2020.

3. Cost Efficiency and Talent Pool India’s burgeoning talent pool, lower operational costs, and pro-business environment are motivating companies to reverse-flip. Moreover, Indian regulators often favor domestic firms for granting operational licenses, especially in regulated sectors like fintech.

Read More: Pine Labs’ Ghar Wapsi: How It will Impact Indians Startup Ecosystem?

The Cost of Coming Back

Despite the benefits, reverse-flipping isn’t cheap. For example:

• PhonePe reportedly paid $1 billion in capital gains tax to the Indian government during its relocation.
• Groww incurred approximately $160 million in restructuring costs.
• Razorpay is expected to pay over $200 million for its move.

These substantial costs have not deterred companies, reflecting their confidence in India’s startup-friendly policies and market potential.

How Startups Are Reverse-Flipping?

The two most common methods for reverse-flipping are:

1. Share-Swap Method: Shareholders exchange their shares in the foreign holding company for shares in the Indian company. However, this triggers capital gains tax in India.
2. Inbound Mergers: The foreign parent company merges with the Indian subsidiary, with fewer tax implications and a streamlined restructuring process.

For example, Pepperfry recently completed its inbound merger, taking advantage of these new regulatory frameworks.

Policy Enhancements to Encourage Returns

The Indian government has been proactive in encouraging startups to return:

• Simplified Compliance: Amendments to the Companies Act and foreign exchange rules have significantly reduced the time and cost of relocating.
• GIFT IFSC: The International Financial Services Centres Authority’s report outlines initiatives to make India a global hub for innovation, including tax-free domiciling and easier exit norms for mergers and acquisitions.

Success Stories of Reverse-Flipping

Several startups have already set benchmarks:

• PhonePe, after relocating, has successfully expanded its services and seen a surge in investments from domestic and international investors.
• Groww, with its focus on retail investors, has benefited from India’s rising stock market participation.
• Meesho, a social commerce platform, is preparing for an Indian IPO to tap into the local market’s growth.

Read More: Can Budget Lure Back Startups? What It Takes for Ghar Wapsi of Titans?

Future Outlook: The End of Flipping?

Industry estimates suggest that 90% of foreign-domiciled Indian unicorns will reverse-flip within the next few years. As regulatory frameworks continue to evolve, the trend of flipping may become obsolete.

With the right policies in place, experts believe India could become the preferred base for global innovation, reducing the allure of foreign jurisdictions like Singapore and Delaware.

India’s Rise as a Startup Powerhouse

Reverse-flipping signifies more than just a regulatory change—it reflects India’s growing dominance in the global startup ecosystem. The country’s appeal lies in its ability to combine robust local markets with supportive government policies, creating an environment where startups can thrive.

As India strengthens its position as a global startup hub, the return of companies is a testament to the country’s evolving entrepreneurial landscape. The next phase could see more startups choosing to grow and list in India, marking a new era of innovation and economic growth.

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